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The Rise Of The Supermarket Industry Economics Essay

This chapter provides an elaborate description on the emergence of the concept of supermarkets in the local and global food and retail industry. The chapter further presents information on the various factors that had influenced the rapid growth of supermarkets and the impact of supermarkets on the components of food chain worldwide and specifically in United Kingdom. Furthermore, it concludes by specifying the impact of supermarkets on all the components of food chain and as well details the role of controlling bodies in UK.

2.1 Historical Background

The phenomenon of chain grocery retailing was observed in the mid nineteenth century, when the Great Atlantic and Pacific Tea Company were established in the year 1859 (Moore, 2001). This was considered as a breakthrough beginning (Whitwell,2006) as in this era the grocery stores were smaller in size and focused on a single item With the advent of time, the markets had seen an expansion in the size and the available items in these grocery stores. Later, in 1916, when Clarence Saunders started the first self-service store “Piggly Wiggly” in Memphis, Tennessee (Walter, 2004) a new business horizon was opened. These stores were popularly referred to as ‘groceterias’ due to their very close resemblance to the cafeteria-style eateries existing at that time (Moore, 2001). In the year, 1920, USA started witnessing the so famously termed “The Chain Store Explosion” (Shearman, 1990). Shearman further added that it was during this time when the chain stores started playing a prominent role in the American food and retailing industry. A large number of small regional chains were established which supplied a large number of products with the exception of meat or any produce. Growth by mergers became a common trend during 1920’s and 1930’s and this proved both good and fatal for the emerging chain stores concept (Moore, 2001). However, the hurdles were soon overcome and during 1940’s – 1950’s, a rapid and a steady growth in low priced retail stores soon took place not only in US but also in Middle East, UK and many more developing economies. These small stores were consolidated into one to produce greater results. This was the emergence of the “Super Market” era.

2.2 Meaning & Definition of “Supermarket”

The meaning of the term “supermarket” had always attached itself with higher flexibility (Samuel, 1984). The main reason behind this could be the thick linearity between the various characteristics possessed by the supermarkets which differentiate them from the service grocery stores and the other service-oriented food market predecessors (Samuel 1984, Marcel 2000). Thus, the precise boundaries of the word supermarket are still hazy even after more than seven decades (Samuel, 1984).

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The most apt definition for supermarket in business terms stated by H.E.Butt (1980) “A supermarket is a large self-service food store selling groceries, meats, household goods, and so on, usually on a cash-and-carry basis. To be classified as a supermarket, it is necessary to have sales of at least $2 million.”

The various other definitions of supermarket are listed in Appendix A.

2.3 Factors Influencing the Rise in Supermarkets

In the last two decades, the role of supermarkets has undergone dramatic and drastic changes (Paul & Wallace, 2006). Today’s market is more competitive more innovative and heterogeneous in its nature (Berdegue, 2002). There are a large number of factors influencing the rapid rise in the supermarkets across the globe and specifically in the United States and United Kingdom.

Both the consumers and sellers (supermarkets) needs are being met exceedingly and hence the strong growth in this field. To gain a better understanding, the factors that are influencing the growth of supermarkets are discussed both from the consumer’s point of view and the seller’s point of view.

2.3.1 Dispersion of Modern Retail over Countries

The existing literature classifies the concept of rise and expansion of supermarkets into three established phases and an emerging fourth phase. The first phase included the countries which were among the initial ones to witness the supermarket sector takeoff during the early and mid 1990s.

According to Reardon & Berdegue (2007), the average contribution of supermarkets to food and retail sector in the countries included in the first group (East Asia, South America, Europe and South Africa) had drastically risen from 10 – 20 percent in 1990 to 50 – 60 percent by the beginning of twenty first century.

In the year 2005, the rapid growing economies of United States and Europe had seen the supermarket contribution to food retail sector had increased further to 75-80 percent (Finch, 2007). The second phase countries (Mexico, Southeast Asia, and Central America) had seen a considerable rise i.e. from 5 – 10 percent in 1990 to 30 – 50 percent by beginning of twenty first century, in the contribution of supermarket to their food retail industry (Reardon & Berdegue, 2007).

The third phase countries (East Asia, Russia and India) had seen the supermarket revolution takeoff in the late 1990s or early 2000s and contributed 5-20 percent to the food retails sector. There could be a varied number of reasons for the late take off in these countries for instance urbanization, women empowerment and so on (Vidal, 2007).

2.3.2 Dispersion over space, product markets and socioeconomic strata

Many countries have seen various trends in Supermarket diffusion as a result of changes in characteristics of space, product categories and consumer segments (Thomas & Hopkins, 2006). For instance, the strategy adopted by the early owners was to first establish the supermarket in large cities and then based on the revenue and profits spread these to immediate cities and towns. Similar strategy was adopted for mergers and joint ventures too (Bruce, 2006).

According to Thomson and Hopkins (2006) the strategy adopted to influence the socio economic strata was to first target the upper-income consumers segments, then move in to the middle class and finally started entering the markets of the urban poor. In order to gain market penetration, the products were categorized into three types.

First group of products that were launched included processed food (canned, dry and packaged items), then the second group of products which were made available to the consumer were semi processed foods (dairy products, chicken, meat etc) and finally now the supermarkets supply perishable products like vegetables too (Wallace, 2006).

2.3.3 Demand – Side Factors

Reardon et al. (2003) had developed a model which enlists the demand side and supply side factors responsible for the dispersion of supermarkets in developed and developing countries. According to this model, a large number of forces drive the increase in demand for the supermarket services.

These forces could be categorized as (1) urbanization, resulting in the increase in the number of women employees which thereby increased the opportunity cost of women’s time and their choice of opting for processed foods to save time and (2) the reduction in the prices of processed products.

As per the author, the key variables that supported these forces were firstly, the growth in the per capita income of the countries with a high margin increase in the income of middle class gave a significant rise in the demand of processed foods, secondly the rapid growth in the ownership of convenient products like refrigerators and cars shifted the trend of daily shopping to weekly or monthly shopping (as per customer’s convenience) and finally the economies of scale in procurement resulted in the lowering of prices.

2.3.4 Supply-side factors

Similar to the demand- side, the supply side of supermarket services is as well driven by a number of forces. The most important among these being the partial or full liberalization of retail foreign direct investments (FDI) (Reardon et al., 2003).

Initially FDI was limited to structural adjustment programs and multilateral or bilateral trade agreements, later it was extended and deepened (Thomas, 2006). The second most important driving force is the advancement in the retail procurement logistics technology and inventory management.

2.4 Overall Impact of Supermarkets (Worldwide)

It is a commonly known fact that the impact of supermarket had been intensive worldwide. There is a vast literature dealing with the impact of supermarkets on the food supply chain and its overall affect on the retail sector in the developing countries (Traill, 2006). The impact could be majorly classified as downstream impact and upstream impact.

2.4.1 Downstream Impact

This category identifies the impact being imparted on the traditional retailers, the local producers and the small convenient retail stores existing in any economy which is supermarket dominant.

The main reason behind the impact is identified as the severe competition for consumers whereby each of the retail market elements is trying their best to attract new consumers while retaining their existing customers (Traill, 2006).

The impact had shown negative trend most of the time and it continues to show a similar trend in the current market scenario. Goldman et al. (1999) in his theory had explained that the rise in the supermarkets is inversely proportionate to the decline of the traditional retailers.

A large number of reasons contributed to the fall of the traditional retailing stores (Wallace, 2006). For instance the store size, the hygiene conditions, lack of financial and management skills, limited and low quality products and so on. Many researchers like Nielsen (2005), Judy (2000), Wallace (2006) hold a strong view that the traditional retailing suffers from vast economic disadvantages (inefficiencies, high costs, shrinkage etc), offers low output level to customers (limited variety, cheap quality, high prices, unhygienic store conditions etc) and lack the skills and abilities (financial, entrepreneurial, managerial etc) required to incorporate change and development.

A further in-depth review of the literature provides the knowledge on the different variations witnessed during the decline phases of the traditional retailing sector. These researchers in their theories concluded that the first retailers to make an exit from the market where the ones selling processed foods, broad lines and dairy products. These were followed by the fresh produce shops and wet markets.

However, there still exist few traditional retailers who have either resisted the competition from the supermarkets by selling the niche products or are the ones where establishing supermarkets are prevented as per legal regulations (Thomas, 2006).

2.4.2 Upstream Impact

This category includes the products suppliers (wholesalers, farmers and processors) to the supermarkets. The supermarkets choose, regulate and tie their suppliers to a medium term contract through their economies of scale (Thomas, 2006).

The supermarkets either operate through their own distribution center which directly deals with the farmers or they deal with specialized wholesalers to supply them with products to be sold (Pesendorfer, 2002). These practices again have their own set of positive and negative impacts on the entire food supply chain.

With the advent of modernized procurement systems, the pressure on the suppliers had increased ten folds (Finch, 2007). The supermarkets now require the supplies to be consistent with respect to quality, volume, costs and commercial practices. This implies higher relationship maintenance and threshold maintenance costs on the supplier’s front (Finch, 2007).

As discussed, the unique selling point of supermarkets is the processed foods (Guardian, April 17, 2007); thus the main source of their supplies is from processors as 65 percent of the goods sold by supermarket are processed and packaged goods, 20 percent is semi processed and the balance 10 – 15 percent is fresh produce (Finch, 2007). Thus, the farmers are the ones who suffer the most in meeting the demand of costs and quality (Finch, 2007).

2.5 Supermarkets in United Kingdom

The UK food retailing industry is considered to be the fastest growing and the most competitive industry in the world (Nielsen, 2005). The major player influencing the industry to a huge extent is the “supermarkets” which constitutes of at least three quarters of the food market (IGD, 2003).

The UK supermarket sector is heterogeneous in its nature (Fearne, Hughes and Duffy, 2001) i.e. different supermarket giants have targeted specific market segments and have adopted strategies that aim at attracting only the targeted group.

For instance, Waitrose and Booths are the up-market retailers, Tesco, Asda, Sainsbury and Morrison’s provides full range of products (one-stop formats), Lidi and Aldi are the ‘deep discounters’ which provides limited self brand products and the Somerfield and the Coops providing services through small and medium size stores to ‘top up’ segments (Duffy and Fearne, 2004a, 2004b).

The recent literature emphasizing on the market share of the supermarkets states that the UK market is showing positive signs of developing duopoly with Tesco and Asda-Walmart dominating the market by a combined share of 49% (IGD, 2003).

However, a large number of critics have opposed this view stating that the nature of market is oligopolistic as they consider the influence of Sainsbury and Morrison to be of equal importance.

Therefore, it could be well concluded that the UK food retailing industry is under the dominance of four supermarket giants – Tesco, Asda, Sainsbury and Morrison. (IGD, 2003; Duffy and Fearne, 2004; Finch 2007; Reardon & Berdegue, 2007). The pie graph below presents

the contribution of each supermarket in the United Kingdom retail economy.

Source:: TNS Data (Worldpanel)

Industry analysis – United Kingdom

The business environment of any sector is not only influence by its internal factor but also to a large extent is being influenced or impacted by its external factors (Jones, 2002).

The national economy

The natural environment


Supplier, customer competitors


Demography structure

Government & Politics

Social structure

Figure: Industry Analysis

In order to understand the extent of external influences on the supermarkets in

UK, the usage of marketing research tools Porter’s five forces and PEST analysis would be very helpful and informative.

a.) Porter’s Five Forces

Michael Porter “Five Forces” is a framework for industry analysis and business strategy development (Kotler, 1999). Porter had devised five competitive forces that identify the intensity of competition and rate of profitability and attractiveness of any firm or industry. Below listed are the driving forces of supermarkets in the UK retail industry.

Threat of New Entrants:

As discussed earlier, the UK grocery market is primarily dominated by four major supermarket chains (Tesco, Asda, Sainsbury and Morrison) which when combined constitutes of 75% of the total market share. According to Ritz (2005), over the last three decades, the UK’s grocery market had been transformed into super-market dominated market. The market is highly competitive and heterogeneous in its nature, hence it possess strong features which provides barriers to the new entrants. Huge capital requirements, product differentiation and economies of scale are the major barriers to the new entrants in the UK grocery sector (Fox & Vorley, 2004).

Bargaining power of suppliers:

In the present context, this force would refer to the power of suppliers (farmers, local producers) in context with the grocery stores who functions under the pressure of losing their businesses to the giant supermarkets. Thus, this further strengthens the position of market leaders Tesco and Asda in negotiating fairer prices (Ritz, 2005). Besides, the suppliers in UK are under constant threat of being replaced by their foreign counterparts (Vorley, 2004). Overall, the tight competitiveness of the market is the reason behind the diminishing profit margins for suppliers and supermarkets.

Bargaining power of customers:

According to Porter (1980), standardization or differentiating product(s) would lower the switching costs which would result in more power being yielded to the buyers. In UK, the market leader Tesco had adopted the strongest customer retention strategy and it is the primary reason behind its increasing profitability (Ritz, 2005). By and large the bargaining power of buyers is considerably strong in this sector.

Threat of substitutes:

It refers to the force which signifies the customer’s behaviour of switching to the alternative product available in the market. The substitute for the supermarkets is the convenience stores or the small and medium sized grocery store. Although, today the supermarkets is UK are not facing the threat of substitutes in real terms, still the market leaders like Tesco and Asda are proactively taking measures by acquiring existing small scale operations and establishing Metro and Express stores in different parts of the country (Ritz, 2005).

Competitive Rivalry:

As discussed above, the UK grocery market is being dominated by the four largest super markets. The strategies adopted for market dominance and retaining market position had further severed the competition. In order to stand the cut throat competition the UK grocery retailers are now engaged in innovating new products and services which is a positive sign for further development of the sector.

b.) PEST Analysis

PEST analysis is used to identify the political, economic, social and technologic factors that influence the operations and existence of a specific business or industry sector. Identifying PEST factors is a highly efficient method of summarizing the external factors of an environment in which a firm operates. Below listed are the PEST factors surrounding the existence and operations of

the supermarkets in United Kingdom:



Competition Commission

Increasing Wage Floor

Restrictive Trade Practices

Declining Agriculture Industry

Retail Industry

Unemployment level

Intense competition

Expansion and Acquisition



Increasing level of bankruptcies

Changing Lifestyles

Convenience in purchasing

Ethical issues in trading

EPOS (Electronic point of sale)

Electronic Kiosks/Catalogues

Scanning of Finger by co-operatives

Scanning of product by consumer

2.6 Impact of supermarkets in United Kingdom

According to Michael (2004, pp10), “The cheap food that supermarkets peddle, comes at a very high price to small manufacturers, tax payers, small farmers and the environment”.

The phenomenal progress in the supermarkets in UK had attracted both rewards and criticism from the literature reviewers. The impact of UK supermarkets on its customers, suppliers, employees, local communities and environment is highly debated issue.

According to Norberg-Hodge et al (2002), in the current market scenario the nature of food had been reduced to commodity and it is encouraging farming to become “more specialized, technology dependent, capital-intensive and innovative”.

To this, Michael (2004) in his research added that “the high trends are disastrous for farmers, local communities, environment and the customers”. Literary works of (Jones, 2002) is filled with criticism on “the methods by which the food is manufactured, processed, transported, distributed and marketed”.

After reviewing the literary works of the scholars, the current and the most prevalent impacts of supermarkets on all its stakeholders (customers, suppliers, employees, local communities and environment) is discussed below.

2.6.1 Impact on Consumers:

As per the market trends and reviews, the impact of supermarkets on consumers had always been positive (bbc.co.uk). Intensity of competition had led the major supermarkets to not only reduce the price but also increase the quality of the products in order to retain existing customers and attract new customers.

Although Michael (2006) and Bevan (2005) had claimed the impact of supermarkets on consumers to be negative, yet due to their lack of strong evidence and support the marketing pioneers had dismissed their theories.

2.6.2 Impact on Suppliers:

Supermarkets demand for low priced products from their suppliers, and according to Michael (2004) this attribute of supermarkets is being governed by their ruthless exploitation of the monopolistic in being the biggest buying power.

Farmers are at the biggest disadvantage and had to agree to all the terms of the supermarkets for their survival. Morgan and Morley (2002) in their study of impact of supermarkets on dairy products concluded that “the vast irregularity of supremacy between producers and retailers is highly considered as an unsustainable relationship and the unseen costs include the loss of local producers of fresh produce”.

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Overall the literature reviews provides a mix view on the impact of UK supermarkets on suppliers. Few direct negative impacts have been outlined above; however these opinion or views are by no means a consensus.

2.6.3 Impact on Employees:

Three quarters of all the food consumed in United

Kingdom is being supplied by the supermarkets. This food is being produced by workers all over the world, majority of who have raised concerns over poor working conditions and lower wages. A large number of questions are being raised on the fairness of employer employee relationship.

There have been instances when these supermarkets had to take proactive measures to avert the potential strikes. For example, Asda in the year 2005 & 2006 had well-publicised disputes with its employees concerning the extra bonuses and bargaining rights. (Personnel Today, 2006).

2.6.4 Impact on Local Communities:

The impact of supermarkets on society had been positive so far. These work towards bringing betterment and improvement in the local community (Piacentini et al., 2000). For instance, in order to further increase the local community’s provision of food, Tesco have built supermarkets in housing estates.

However, there are many who hold the view that the UK supermarket’s impact on local communities is their impact on competitors (small and local businesses).

The ACCPE (Advisory Committee for Consumer Products and the Environment, 2005) is of the view that the existence and dominance of supermarkets in food areas is destroying the local businesses. Further, as per DEFRA (2006), the supermarkets in UK are driving local convenience stores out of market/business.

Impact on the Environment:

The major hurdle being faced by the UK retailers are the environmental concerns (Piacentini et al., 2000). Noderberg-Hodge et al (2002) had further reconfirmed the view by pointing out the ecological drawbacks (reliance on large scale centralised energy infrastructures) of the supermarkets.

FOE (Friends of the Earth) has proved themselves to be one of the strongest critics of the supermarkets, who in their article “Checking out the Environment? Environmental Impacts of Supermarkets” (2005) have mentioned the local, national and global impacts of supermarkets. Few of the impacts discussed in their article were the traffic congestion, use of pesticides, climate changing emissions, wastage of food and so on.

However, not all the academics are of the same view. For instance, according to Piacentini et al (2000), Sainsbury and Tesco are one of the initiators of taking proactively the responsibility to address the environmental concerns.

2.7 Supermarket and the Role of Controlling bodies

The two major controlling bodies in UK ensuring the trade code of practices are OFT (Office of Fair Trading) and CC (Competition Commission). OFT, established in 1973, is a non ministerial governing body in UK which acts as an economic regulator enforcing competition law and consumer protection practices (OFT, 2004). The two primary functions of the OFT body is to study the market behaviour and to communicate the same to the consumers.

The secondary functions includes licensing, estate agency, credit reference disputes, anti-money-laundering supervision, delivering information, monopolies, scheduling education programs and campaigns to consumers and businesses and also advising through Consumer Direct (www.oft.gov.uk)

OFT is closely linked with CC (DTI, 2002) – The Competition Commission which is also a non ministerial public body, established in 1998, and is responsible for investigating mergers and other related market enquiries concerned with industries regulated under competition law practised in the United Kingdom (CC, 2000).

Besides, the primary function of investigating mergers, this body has the power to take appropriate decisions and actions on specific inquiries, block the mergers, asking the companies to sell off assets and incorporate changes in the market operations (www.competition-commission.org.uk)

The OFT and CC had been criticized for being ineffective and inefficient in providing the decisions on pending investigations (Hertel & Aarts, 2002). Concerns have been raised about the monopolistic control of the Supermarkets as they are offering poor returns to the farmers.

A Barlow, Chief Executive of English Apples & Pears pointed out that though over the past seven years demand for English produce has increased but poor returns for the farmers mean that in the long term conditions for the producers would not be ideal.

He claimed that this could result in cutting down the trees but his claim was not backed up with any market survey. (Sixsmith, Rachel Horticulture Week; 10/9/2009, p30-30, 1/3p). In order to bring in efficiency and transparency in the operations of the department the Enterprise Act of 2002 was introduced to bring major changes in the competition law of United Kingdom.

The Enterprise Act 2002 had played a pivotal role in influencing the role and powers of OFT and CC in UK. The Act had brought in large number of reforms to strengthen the fair practices competition along with an increase in productivity and profitability of businesses.

However, it was noted that not all the supermarkets were compliant towards adhering to the introduced Code of Practice and thus the system was once again criticized to be too weak.

To provide a solution to this ongoing problem, a stronger code called Grocery Supply Code of Practice (GSCOP) was introduced in February 2010. (www.tescopoly.org). Adding to that an appointment of Ombudsman is also recommended by The Competition Commission (CC) who will observe the effectiveness of the latest GSCOP. (Smith, Rachel, Horticulture Week; 2/21/2008, p27-27, 1p)

In January 2010 chairman of British Independent Fruit Growers Association (BIFGA) J Breach proudly announced that it took a campaign of fifteen years to appoint an Ombudsman who is going to supervise the implement of GSCOP, which clearly justifies the importance of this research (Six smith, Rachel: Horticulture Week; 1/22/2010, p29-29, 2/3p)

2.8 Chapter Summary

This chapter had discussed few major characteristics of supermarkets like its historical background, meaning and definition, worldwide influence and specifically its influence on UK’s economy. UK’s industry analysis was done using the research instruments Porter’s Five Forces and PEST analysis.

Furthermore, a brief description was provided on the impact of supermarkets on the various components involved in the food chain. In order to meet the current study requirement a research (qualitative analysis) would be done to obtain a detailed analysis on the impact of supermarkets on local producers (suppliers only).

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